It is generally agreed that where there are two distinct objectives, 
there should be two distinct policies, with each policy instrument 
targeting the objective upon which it has the greater influence.

Interest rate policy impacts both the GDP price index and the index 
of asset price. But what if these two indices are moving in opposite 
directions?

Notoriously, in the summer of 1929 policy makers, fixated on asset 
prices and the real bills or commercial loan theory of banking as 
their guide, raised interest rates sharply just as the real economy 
was turning down and despite consumer and wholesale prices that had 
been steady or falling for some years. Interest rate policy and 
monetary tightening accentuated the real downturn which then helped 
to puncture the stock market with calamitous consequences.

Thus asset price bubbles require separate measures (e.g., land value 
taxation; higher downpayments on mortgage finance; or 
counter-cyclical capital-adequacy requirements) while maintaining 
interest rates and money at levels consistent with non-inflationary 
full employment growth.

Roger Sandilands